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Selling a Corporation: Stock Sale versus Asset Sale

One of the biggest decisions facing business owners is selling the business. Many aspects of a business sale are determined during negotiation between the buyer and the seller. An impactful decision for corporate shareholders is whether the transaction shall be structured as a stock sale or an asset sale. A stock sale is when shareholders transfer the corporation by selling the corporate stock. In an asset sale, shareholders keep the corporate stock and the corporation sells its assets subject to its liabilities. The buyer and seller have competing desires due to different outcomes that result from the tax treatment of a stock sale versus an asset sale. It is important to understand the tax implications of both sides of the transaction.

Maximizing Cash Flow

After-tax cash flow is an important issue for the selling party. This means minimizing the amount of taxes paid on the sale, thus increasing cash available post-close. The selling party typically prefers to sell its stock so the entire sale will be treated as a capital gain. Capital gain treatment allows for a lower tax rate, thus the seller walks away with more after-tax proceeds. Alternatively, if a business is sold in an asset sale, a portion of the sale price is applied to inventory, receivables, and depreciation recapture. These income items are taxed at ordinary tax rates, as opposed to lower capital gain tax rates.

Hurdles to Overcome

The buying party is also looking to maximize after-tax cash flow. A stock purchase is less attractive to the buyer who typically prefers to purchase the assets. When the buyer purchases assets, it has the ability to “step-up” assets to fair value and re-depreciate tangible property or amortize the value of goodwill created from the acquisition. The buyer can immediately recover some of the purchase price in the form of depreciation and amortization, sheltering current operating income from tax. If the buyer purchases corporate stock instead, they cannot “step-up” the business assets to fair value and re-set the depreciable basis. In a corporate stock purchase, the ability to shelter operating profit with depreciation and amortization is lost and the purchase price is forever trapped as stock basis, which cannot be deducted until the stock is sold.

Another hurdle seller’s face when negotiating a stock sale is the buyer’s reluctance to assume responsibility for predecessor liabilities. A stock purchase causes angst from a buyer’s perspective because they are assuming the liability of future lawsuits, employment issues, and other costs that can arise from the business practices of former shareholders. In negotiations between buyers and sellers, both parties must work with their advisors to agree on representations, warranties and indemnities outlined in the purchase agreement.
Business owners make every attempt to keep good records throughout the course of business; however, issues may arise during the due diligence process that create hurdles when negotiating a stock sale.

There is opportunity to anticipate and overcome these hurdles for business owners that perform pre-transaction planning and have a clear exit strategy, strengthening the selling party’s position at the negotiation table.

In some cases, the buyer will not accept an option other than an asset purchase. Businesses that are not organized as a corporation (e.g., partnerships, LLCs, etc.) may be left with only the option of selling its assets. When dealing with an asset sale, businesses should work with their team of advisors to negotiate an asset price allocation that is in their favor. There is opportunity to minimize the amount taxed at ordinary rates, maximize the capital gain allocation, and maximize after-tax proceeds.

Working with your team

It is never too early to begin preparing a business for a potential sale. With early preparation, a business will be ready to take advantage of exit opportunities at a moment’s notice and will be positioned favorably at the negotiation table. Businesses should have a team of advisors ready to assist before, and during, the sale process. Our team can help build an exit strategy, navigate a transaction, overcome hurdles, and celebrate a successful transaction upon closing.

If you have questions or would like more information about how Windes can help, please contact Christy Woods at or 844.4WINDES (844.494.6337).


Christy Woods, CPA
Christy Woods, CPA, MST

Partner-in-Charge, Tax – Long Beach
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